Hyperliquid & Paradigm Tell Treasury: Don't Make Stablecoin Issuers the Blockchain's Hall Monitors 🏛️

The lobbying arm of crypto futures exchange Hyperliquid and venture firm Paradigm have urged the US Treasury to revise a proposed anti-money laundering and sanctions rule for stablecoin issuers, warning that sweeping secondary-market obligations could push regulated dollar tokens out of decentralized finance.

In a letter sent Tuesday to FinCEN and OFAC, the Hyperliquid Policy Center and Paradigm challenged a proposed rule implementing the GENIUS Act's AML and sanctions requirements for permitted payment stablecoin issuers.

The two groups endorsed FinCEN's approach of placing compliance obligations on the "primary market," where issuers hold direct customer information, and taking a "limited approach" to the secondary market, where issuers generally only see wallet addresses and transactions. "The same principle should guide the agencies' implementation of AML and sanctions requirements for stablecoins deployed to permissionless environments," they wrote. They argued the proposed rule pulls secondary-market activity into an issuer's compliance perimeter that issuers "cannot meaningfully police" and treats smart contract interactions as carrying sanctions liability "regardless of whether the issuer has any relationship with, or visibility into, the transacting parties."

A wallet address "that simply holds or transfers" a stablecoin should not be treated as an issuer customer, the groups argued, adding that developers, protocol operators, and validators should also be shielded from issuer-style obligations when they have "no direct relationship with the issuer." Applying issuer-style rules to secondary-market activity, they said, would generate "an avalanche of noisy, false-positive-laden, low-value SARs" — suspicious activity reports. They also warned the approach would incentivize issuers to deploy only to permissioned environments, "pulling U.S.-regulated stablecoins out of DeFi" and creating "a void filled by unregulated, offshore, non-dollar alternatives."

The Treasury proposed the rule in April to implement GENIUS Act provisions requiring stablecoin issuers to have the capability to block, freeze, or reject transactions that violate US law or sanctions on both the primary and secondary markets. The GENIUS Act was signed into law by US President Donald Trump last year, with the law set to go into effect in January 2027 at the latest as federal agencies work on implementation.

Matthew Pinnock, COO at Altura DeFi, told Decrypt that regulators are trying to ensure stablecoins do not become "a blind spot for sanctions enforcement and illicit finance" as they grow as global payment rails, comparing the issuer's post-issuance visibility to asking a bank to track "every cash transaction after money leaves an ATM." Siwon Huh, an analyst at crypto research firm Four Pillars, told Decrypt that a broad secondary-market carveout could also create enforcement gaps for sanctioned entities.

The Senate is currently debating a crypto bill, dubbed the CLARITY Act, that could include further rules for stablecoin issuers and remove liability for developers of crypto platforms regarding money laundering and sanctions compliance, with some lawmakers pushing for a full Senate vote on the bill before the November elections.